June 3, 1977

77-33 MEMORANDUM OPINION FOR THE

SECRETARY OF THE DEPARTMENT OF

HOUSING AND URBAN DEVELOPMENT

Constitutionality of S. 1397—Federal National

Mortgage Association

The Attorney General has asked that we respond to your request for 

an opinion concerning the constitutionality of the provisions of S. 1397. 

The proposed legislation would amend the Federal National Mortgage 

Association Charter Act to increase the size of the Board of Directors 

of the Federal National Mortgage Association (FNMA), and would 

make FNM A subject to the Freedom of Information Act.

FN M A ’s counsel has prepared a legal memorandum arguing that S. 

1397 raises Fifth Amendment questions regarding the prohibitions 

against the taking of private property without “due process of law” or 

“just compensation.” Your legal counsel prepared a rebuttal paper to 

FNM A counsel’s arguments, and concluded that FNM A’s arguments 

were without merit. We have reviewed the proposed legislation and 

relevant case law and it is our conclusion that the enactment of S. 1397 

would constitute a legal exercise of congressional power and clearly 

stand within the boundaries of the Constitution.

At present, the Board of Directors of FNMA (the Board) consists of 

15 persons, 5 appointed annually by the President and 10 elected annually by the common stockholders.1 S. 1397 would amend § 308(b) of 

the National Housing Act to allow the President to appoint 9 directors 

while leaving the number elected by the common stockholders at 10. 

This proposed amendment raises four questions of law that require 

discussion in order to determine the ultimate question of the constitutionality of S. 1397.

(1) Did the charter granted to FNMA by the Government create 

contractual rights between the Government, FNMA, and the 

stockholders?

1 See 12 U.S.C. § 1723(b) (1970). Initially, F N M A ’s preferred stock was held by the 

Secretary o f the Treasury. It was retired in accordance with the Act, and FN M A became 

a privately ow ned corporation. See 12 U.S.C. § 1718 (1970).

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(2) Are contractual rights derived from a legislative act protected by the Constitution?

(3) Do the stockholders of FNMA have vested rights to the 

continuation of FNMA’s charter in its present form?

(4) If the proposed legislation were enacted into law, would it 

effect a “taking” of FNMA’s stockholders property without “due 

process of law” or “just compensation”?

In our opinion, the answer to the first two questions is yes and to the 

latter two is no.

The starting point, more out of tradition than legal necessity, is the 

Dartmouth College Case.2 The Supreme Court held that the granting of 

a charter by the State of New Hampshire to the school created a 

contract between the State, the trustees, and the individuals who conveyed property to the corporation. When the State of New Hampshire 

attempted to amend the charter to increase the number of trustees, the 

Supreme Court held that the legislation amending the charter violated 

Article I, § 10 of the United States Constitution, which, inter alia, states 

that “[n]o state shall . . . pass any . . . Law impairing the obligation 

of Contracts.”

While the congressional action proposed in S. 1397 is analogous to 

that involved in the Dartmouth College Case, it is well settled that “[t]he 

Contract Clause . . . is a limitation on state rather than federal 

action.” 3 And, the question whether the Federal Government can pass 

laws that modify, amend, or repeal contracts between it and private 

parties has been answered in the affirmative.4 However, “a measure of 

protection against contract impairment by the federal government is 

given by the Fifth Amendment.” 5 The Supreme Court, in Lynch v. 

United States* held that rights under a contract with the Government 

are property, which the Fifth Amendment protects from a statutory 

“taking” without just compensation.7

It seems clear that (1) the Federal Government is not restrained by 

Article I, § 10 of the Constitution from impairing the obligation of 

contracts; (2) the Federal Government, through legislation, can create 

contractual rights with private parties; and (3) these contractual rights 

are property that is protected by the Fifth Amendment. Thus, we 

conclude that the Federal Government has the power to alter the 

obligation of contracts and “need only adhere to the due process 

requirements of the Fifth Amendment.” 8

2 Dartmouth College v. Woodward, 17 U.S. (4 W heat) 518 (1819).

3 John McShain, Inc. v. District o f Columbia, 205 F. 2d 882, 883 (D.C. Cir., 1953).

4 See cases cited infra, at notes 9, 10, and 12.

5 John McShain. Inc. v. District o f Columbia, supra, note 3, 205 F. 2d at 884.

•292 U.S. 571 (1934).

7 Id. at 579.

8 United States v. One 1962 Ford Thunderbird, 232 F. Supp. 1019, 1021 (N.D. 111., 1964).

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The case law supports the foregoing conclusion.9 As the Supreme 

Court stated in Federal Housing Administration v. The Darlington, Inc.,10

“ ‘[s]o long as the Constitution authorizes the subsequently enacted 

legislation, the fact that its provisions limit or interfere with previously 

acquired rights does not condemn it. Immunity from federal regulation 

is not gained through forehanded contracts.’ ” 11

Moreover, at least one case suggests that the Federal Government 

can modify or rescind a contract by later legislation without regard to 

the prohibitions of the Fifth Amendment, except where rights are 

vested.12 This raises the question whether the stockholders of FNMA 

have a vested right to the continuance of FNM A’s charter in its present 

form.

The case of Fahey v. O'Melveny & Myers 13 teaches that, to determine 

whether the stockholders of FNMA have a vested right in its present 

form, one must look first at the nature of the contract. Although not 

the same case, O'Melveny & Myers points to the right legal direction in 

the present matter. Like FNMA, the privately owned corporation in 

O'Melveny & Myers was a creature of Federal legislation. The predecessor of the Federal Home Loan Bank Board had abolished the Federal 

Home Loan Bank of Los Angeles and Portland (Oregon) and merged 

them into a new Federal Home Loan Bank of San Francisco. The court 

reviewed the Home Loan Bank Act and the contractual obligations it 

established, and concluded that

“. . . a Federal Home Loan Bank is a federal instrumentality . . . 

neither the bank nor its association members, although they are 

nominally stockholders, acquire under the provisions of the Bank 

Act, any vested interest in the continued existence of said bank or 

any legally protected private rights which would enable them to 

invoke the due process clause.”14 

The court noted that “[t]his legislatively created system of Home Loan 

Banks exemplifies the principle that whatever rights and privileges 

Congress may constitutionally confer, it may withhold. . . .” 15

Similarly, the Federal National Mortgage Association Charter Act 

provides the only authority for the creation of FNMA, and expressly

9 See, Norman v. B. & O. R. Co.. 294 U.S. 240, 309-310 (1935), holding that “[t]here is 

no constitutional ground for denying to the C ongress the pow er expressly to prohibit and 

invalidate contracts although previously made, and valid w hen made, w hen they interfere 

with the carrying out o f the policy it is free to adopt;” Hart v. Aluminum Co. o f America,

73 F. Supp. 727, 728 (W.D. Pa., 1947), stating that “[b]y a subsequent statute Congress 

may w ithdraw rights granted by a statute without violating any provision o f the Constitution” ; and Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 437 (1934), w here 

the C ourt stated that “ [t]he econom ic interests o f the State may justify the exercise o f its 

continuing and dom inant protective power notw ithstanding interference with contracts.”

10 358 U.S. 84 (1958).

'■ Id. at 91.

'‘ Southwestern Petroleum Corporation v. Udall, 361 F. 2d 650, 654 (10th Cir., 1966).

” 200 F. 2d 420 (9th Cir., 1952).

14 Id. at 446.

11 Ibid.

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authorizes its business existence. While, under the statute, after a transition period, it was to become a privately owned corporation, it is a 

corporation of the United States. Unlike O'Melveny & Myers, the 

charter did not invest FNMA “with all the attributes and characteristics of a purely private corporation and immediately clothed it and all 

of the properties in its control and possession with all of the protections 

provided by general law as in a case where a purely private corporate 

enterprise was involved.”18

The legislative history demonstrates that FNMA was to be a “G overnment-sponsored private corporation” with “a status analogous to 

that of the Federal land banks and the Federal home loan banks.” 17 

Moreover, 12 U.S.C. § 1723a(h) provides that “[t]he Secretary of Housing and Urban Development shall have general regulatory power over 

the Federal National Mortgage Association and shall make such rules 

and regulations as shall be necessary and proper to insure that the 

purposes of this subchapter are accomplished.”17

FNMA was organized to carry out a public policy.18 Its organization 

and incorporation are pursuant to a law of Congress which authorized 

its undertaking. Thus, all obligations on the part of the Government 

and any rights of the shareholders derived from those obligations “must 

be understood as having been made in reference to the possible exercise 

of the rightful authority of the Government, and that no obligation of a 

contract ‘can extend to the defeat’ of that authority.”19

As previously noted, it is true that Congress intended that the stock 

of FNMA be privately owned, but it also intended that the hand of the 

Federal Government would continue to rest upon its shoulder; it remains subject to the regulatory oversight of both the Department of 

Housing and Urban Development and the Department of the 

Treasury.20 It has been stated that “[t]hose who do business in the 

regulated field cannot object if the legislative scheme is buttressed by 

subsequent amendments to achieve the legislative end.” 21

It is our opinion that FNMA’s stockholders have no vested rig h t22 to 

the continued existence of FNMA in its present form and no protected 

private right that would enable them to invoke the prohibitions of the 

Fifth Amendment.23 To vest them with such a right would be to tie the

16 Fahey v. O ’Melveny & Myers, supra, note 13, 200 F. 2d at 442.

17 See S. Rep. No. 1123, 90th Cong., 2d Sess. 79 (1968).

18 12 U.S.C. § 1723a(h) states that “[t]he Secretary may require that a reasonable 

portion of the corporation’s m ortgage purchases be related to the national goal o f 

providing adequate housing for low and moderate income families. . . .”

. '• Norman v. B. & O. R„ supra, note 9, 294 U.S. at 305. “N ot only are existing law s 

read into contracts in order to fix obligations as between the parties, but the reservation 

of essential attributes o f sovereign pow er is also read into contracts as postulate o f the 

legal order . . . .” Home Building & Loan Association v. Blaisdell, supra, note 9, 290 U.S. at 

435.

“ See 12 U.S.C. §§ 1717(a)-(b), 1718, 1719, and 1723a(h) (1970).

21 FHA v. The Darlington. Inc., supra, note 10, 358 U.S. at 91.

22 See text, supra at pages 5-7 and note 35, infra21 See text, supra at notes 14 and 15, and note 35, infra.

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hands of Congress in its attempt, through legislation, to provide adequate housing for its citizens.24 Only recently, the Supreme Court stated 

that “[a]s is customary in reviewing economic and social regulation, 

however, courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.”25

The final question on this matter is whether S. 1397 would result in 

“taking” of FNM A’s stockholders’ property without “due process of 

law” or “just compensation”? For the reasons set forth above, we 

respond in the'negative. W e concluded above that FNMA stockholders 

have no vested rights in the continuation of the FNMA charter in its 

present form. However, even if FNM A’s stockholders have an “inchoate” or a “vested” right that is protected by the Fifth Amendment, we 

do not think the action contemplated by the proposed legislation would 

enable them to invoke the prohibitions of the Fifth Amendment. As 

was pointed out in El Paso v. Simmons,26 “. . . it is not every modification of a contractual promise that impairs the obligation of contract 

under federal law . . . .” 27 particularly, where a revision of law makes 

no real substantive change.

Furthermore, Congress expressly reserved the right to dissolve 

FN M A ’s charter.28 Because Congress has the right under the enabling 

law to abolish FNMA, it arguably has the right to amend or otherwise 

alter the charter as it sees fit.29 But, if FNMA’s stockholders had an 

“inchoate” or “vested” right to its continuing in its present form, then a 

stockholder’s right could be materially affected differently if the corporation continued under a different managerial scheme than if it were 

dissolved and liquidated.30 These considerations, however, carry little 

import in the present matter.

As noted above, the proposed legislation would increase the number 

of persons appointed to the Board by the President from five to nine, 

leaving the number elected by the common stockholders standing at 10. 

Therefore, S. 1397 would have the effect of reducing the number of 

directors elected by FNMA’s stockholders from two-thirds to one more 

than one-half. But, what effect would this contemplated action have on

24 “T he presum ption is that such a law is not intended to create private contractual or 

vested rights but m erely declares a policy to be pursued until the legislature shall ordain 

otherw ise.” Dodge v. Board o f Education, 302 U.S. 74, 79 (1937).

25 United States Trust Company v. New Jersey, 431 U.S. 1, at 23-24 (1977).

“ 379 U.S. 497(1965).

27 Id. at 506-507.

28 See 12 U.S.C. § 1717(a)(2)(B) (1970).

“ C ongress has the constitutional pow er to abolish a legislatively created corporation, 

even if it does not expressly reserve such power. W hatever rights and privileges Congress 

is authorized to give, it is also authorized to take away. See text, supra at note 15. It seems 

unnecessary to say that an existing legislature could not pass a law that a subsequent 

legislature could not amend or repeal.

“ U pon liquidation the stockholders w ould be entitled to a pro rata share o f the 

corporation’s assets after payment o f all indebtedness. U nder a new managerial scheme, 

assuming they decided to end their association with the corporation, they would be 

forced to sell their stock at the market price, w hich m ight be more or less than they 

w ould receive if the corportion w as dissolved.

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any “inchoate” or “vested” rights of FNMA’s stockholders? On its face 

it would appear to impair their ability to exercise control over the 

policies and business judgments of the corporation.31

First, as the Supreme Court stated in Norman, “[c]ontracts, however 

express, cannot fetter the constitutional authority of the Congress. Contracts may create rights of property, but when contracts deal with a 

subject matter which lies within the control of the Congress, they have 

a congenital infirmity.” 32

Thus, as was pointed out in O'Melveny & Myers, “. . . men do not go 

blindly into these Home Loan Bank ventures—they assume all of the 

obligations with all of the legislative and administrative ‘strings’ attached when a charter is granted to them by the Board.” 33 In the 

present matter, the stockholders entered the arrangement with “all of 

the legislative and administrative ‘strings’ attached.” One of those 

“strings” was the chance that a subsequent legislature would exercise its 

constitutional authority and amend FNMA’s charter.

Second, §4.09 and § 4 .12(b) of the bylaws make clear that policies 

and business judgments can be made by a simple majority.34 Thus, 

stockholders would still elect a majority of the Board’s members.

Moreover, the extent to which the Board of Directors sets policies 

and makes business judgments must be considered in light of the fact 

that 12 U.S.C. § 1723a(b) provides that “[n]o stock, obligation, security, 

or other instrument shall be issued by the corporation without the prior 

approval of the Secretary.” 35 This requirement stands whether the 

majority vote on a particular matter is 51 percent or 100 percent.36 

Thus, the proposed legislation would leave the stockholders close to 

where it found them; the harm, if any, is relatively small when all of 

the appropriate factors are considered.37

As we stated at the beginning, S. 1397 also would make FNMA 

subject to the provisions of the Freedom of Information Act. Little

51 It should be noted that the proposed legislation in no way tampers with FN M A ’s 

common stock, and thus does not diminish its value to the stockholders or its voting 

strength.

MNorman v. B. & O. R. Co., supra note 9, 294 U.S. at 307-308.

” Fahey v. O'Melveny & Myers, supra note 13, 200 F.2d at 444.

S4A tw o-thirds affirmative vote o f the Board of Directors is required to alter, amend, 

or repeal the bylaws. See A rticle 7 o f the ByLaws of the Federal National M ortgage 

Association, as amended.

» “ vested right * • * [is] one which is absolute, complete, and unconditional to the 

exercise o f which no obstacle exists, and which is immediate and perfect in itself and not 

dependent upon a contingency.’ ” Hutton v. Autoridad Sobre Hogares De La Capital, 78 F. 

Supp. 988, 994 (Puerto Rico, 1948). Under 12 U.S.C. § 1723a(h), the Board o f D irectors 

do not have this absolute, complete, and unconditional right, the stockholders’ right can 

be no greater. See also note 18, supra.

3® It could be argued that the Secretary is more likely to approve a decision of the 

Board if its vote is 10 to 5 as opposed to 10 to 9. But the m atter in question calls for an 

interpretation o f the law, not a forecast o f the Secretary’s probable actions.

57 “ Laws which restrict a party to those gains reasonably to be expected from the 

contract are not subject to attack under the C ontract Clause, notwithstanding that they 

technically alter an obligation o f a contract.” E l Paso v. Simmons, supra, note 26, 379 U.S. 

at 515.

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need be said on this issue except that Congress, as a matter of public 

policy, has the constitutional power to subject the FNMA to the 

Freedom of Information Act. It is worth noting that Amtrak, a privately owned corporation,38 is already subject to the Act.39

For the foregoing reasons we are of the opinion that S. 1397 is 

constitutional.

J o h n M . H a r m o n

Acting Assistant Attorney General

Office of Legal Counsel

38 Like FN M A , A m trak is a privately owned corporation that was created by an A ct of 

Congress.

38See 45 U.S.C. § 546(g) (Supplement V, 1975).

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